FrontierView recently launched The Lens, a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business executives. For instance, below are NAFTA updates from this week’s edition, “New NAFTA could reduce US growth, says US government report.”
- As required by law, an independent government agency has submitted to Congress an economic impact analysis of President Donald Trump’s NAFTA replacement, the US-Mexico-Canada Agreement (USMCA).
- In a default scenario, the report concludes that US real GDP, employment, and wages would minimally decrease if the USMCA was passed. In a slightly more positive scenario, the US would see minimal gains.
- The most important change in the USMCA is a more robust ‘rules of origin requirement’ for the auto industry. The study concludes that this change would result in higher priced autos that would reduce US auto production and sales. Hence, leading to an overall negative impact on the US economy.
Our view
We do not expect the USMCA to be passed by the current US Congress. Therefore, we have revised our base-case view from 55% to 75% that the USMCA will not be ratified by the US. This reduces the likelihood of a ratification in 2019. The Democrats, who control the House, do not want to grant Trump an important victory in the lead-up to the 2020 election. This study provides a clear talking point for congressional Democrats to justify this stance. The risk that Trump will threaten to pull out of NAFTA if Democrats refuse to implement the USMCA remains. However, we believe the economic impact would hurt his election chances too much to make this a credible threat.
Business implications
Expect NAFTA, not the USMCA, to continue to govern trade flows between the US, Mexico, and Canada. Therefore, uncertainty will continue to limit investment flows into Mexico and Canada, mainly reflected now in weak exchange rates. Therefore, this may be a good time to consider strategic acquisitions across the borders to service US demand.
– Ryan Connelly, Senior Analyst for Global Economics and Scenarios
FrontierView clients: For more on our NAFTA scenarios see our most recent Events to Watch for 2019